Question

In a closed economy what if people choose to save some of their incomes, explain why even with that assumption, it is still expected that GNE = GDP = GNI. (Hint: think about what Classical Economics says about leakages and injections)

Answer 1

According to the classical theory, savings is leakage from the economy because whole income is not spent on the consumption, however, this leakages is temporary it again injected into the economy through investment by the producers.Thus GNE=GDP=GNI

Thus, according to the clasical economist savings is the real problem for the economy whatever the saved automatically invested by the producer for the further production by the firm.

This view later challenged by the J.M.Keynes in the general theory of the employment, because these assumptions of the classical economist are not realistic on savings and investment equilibrium.